Downsizing almost inevitably imposes substantial psychological costs on the workforce. It comes with some social costs for the community, at least in the short-term. And the available evidence on its bottom-line impact isn’t clear. So the question” Must you downsize?” should be pondered carefully.
Of course, the costs and benefits of downsizing depend on the particular circumstances of the organization. If downsizing seemingly works best when tied to a plan for restructuring or repositioning, then the extent to which management has a good sense of what it is doing and why is crucial.
Family cultures, in which employment has been cast as a social bond rather than a stark exchange relation, are likely to suffer relatively more from downsizing. Firms that depend on good relations with the surrounding community and that loom larger in the local labor market will also find downsizing to be more costly.
Firms in a tight labor market will face a stronger adverse selection problem in terms of who departs, although a tight labor market will mitigate the damage to those who depart and thus on the community and on the psychological state of the survivors.
Technology and work organization also figure prominently.
Where tasks are interdependent, downsizing tends to be more disruptive, both economically and socially. Particularly when a firm’s culture and technology emphasize cooperation across units, downsizing strategies that explicitly or implicitly pit different segments of the organization against one another in struggling to retain employees can be extremely destructive. One common solution to this problem is simply to mandate “across-the-board” layoffs, with each business unit being given a fixed percentage of headcount or payroll that must be trimmed.
With respect to business strategy, organizations that seek competitive advantage from continuous improvement or by transferring knowledge gained in one product, service, or division to another part of the firm will tend to suffer most from the knowledge losses wrought by downsizing.
If an organization has relied on secure employment, promotion from within, employee investments in firm specific training, and the like, layoffs can certainly be expected to undercut workers’ confidence in the employer’s representations about future prospects.
Organizations with seniority-based protections built into their human resources systems may stand to gain less economically from downsizing, because the layoffs will disproportionately hit workers with lower seniority, who are presumably making less money.
And obviously the cost implications of a layoff will depend substantially on the benefits plans an employer has adopted – for instance, its health and pension plans and obligations for continued coverage that may be mandated by law, collective bargaining agreements, or company policy.
In other words, in thinking through whether a layoff makes good business sense, an employer needs to be assessing both the impact of past human resources practices on the costs and benefits of a layoff, and the impact of a layoff today on the kinds of human resources practices the firm will be able to implement in the future.
Against these costs and the benefits to be accrued, you have to consider alternative actions the organization might take to address the problems or to meet the new circumstances that have led you to consider downsizing. Wage cuts, hours adjustments, job transfers, and reassignment of work across plants are all alternatives to be considered.
Especially when it comes to layoffs that respond to short-lived changes in economic conditions, such alternatives can be quite cost-effective.
Notice also in this regard that four important factors may bear on a firm’s ability to avoid downsizing:
a) Its inventory policy;
b) The extent of uniformity in its operations (including human resources policies) across work sites;
c) The extent to which it has cross-trained workers; and
d) The extent of vertical integration.
One strategy taken by many high-commitment organizations to minimize layoffs is to respond to temporary downturns by producing for inventory or by redeploying workers to other tasks, such as deferred maintenance.
Another strategy sometimes used is to re-assign work across work sites, to smooth out fluctuations in demand. This will be easier to do in a firm that is vertically integrated with a variable taper; then the taper can be adjusted, with workers deployed downstream when demand is strong and upstream when it is slack. Of course, a firm’s ability to re-assign work across sites will be easier to the extent that the firm has uniform operations and human resources policies in its different work sites.
If a firm is running a high-commitment system in one site and a “high-control” system in another, it is harder to imagine how it could respond to a cyclical downturn by shifting work or workers from one of the sites to the other.